Helping seniors preserve health and financial security for themselves and their loved ones.

Monday, April 28, 2014

Claiming Social Security Retirement Too Early can be a Big Mistake

Most seniors claim
their Social Security retirement benefit too soon.

As they enter their 60s workers usually understand
that they can claim their Social Security retirement benefit at any time between age
62 and 70. But they don't understand the full implications of this crucial decision.

Most of them decide to claim their benefit sooner rather than later.
In my opinion, this is more often than not a mistake.

Full retirement age (FRA)
is 66 for people born between 1943 and 1954. If you claim before your FRA, you
receive reduced benefits. The longer you wait, the more you increase the monthly
benefit you will receive based on your work record. This reduction (or
increase) in benefits is permanent: it will continue for the remainder of your life. Even if you
live to be 100 years old or more.

Your decision to claim
early may reduce your spouse's benefits as well. If you are married and are the
higher earner spouse, waiting to take Social Security retirement will usually provide
a higher survivor benefit for your spouse if he or she outlives you. The
earlier you claim, the more the survivor’s benefit will be reduced.

Unfortunately, claiming early is the popular choice. Most workers start taking their benefits before they reach
their FRA. According to the Social
Security Administration Annual Statistical Supplement for 2012, 74% of retired
workers elect to claim their benefits early. This means they will receive
reduced benefits for the remainder of their lives and diminish the survivor benefit
available to their spouse.

Perhaps because they have lower income from other sources, relatively more women (76.4 percent) than men (71.3
percent) elect to claim reduced benefits.

Most experts believe that
claiming early can be a huge mistake that can cost retirees a lot of money over
the rest of their lives. People don’t adequately consider the long term
consequences of their action. People don’t understand how risky it is to claim
early.

Social Security retirement
is a unique benefit that can be a particularly valuable resource as you
age and your other assets and sources of income dissipate. Unlike most other resources, Social Security increases each year to offset the effects of
inflation. It is not subject to the whims of the stock market. And it is
government guaranteed.

And unlike your other
resources, Social Security is a benefit that you cannot outlive. The reality is
that people are living longer. If you and your spouse are both age 65 today,
the probability is that at least one of you will live to age 90. Few people
have saved enough to protect themselves from this “longevity” risk.

Longevity risk may be
your biggest potential source of financial insecurity in retirement. You don’t
want to enter your late 80s with your savings dried up and your sources of income reduced. But you can protect yourself from longevity risk by maximizing
your Social Security – a source of income that grows each year to keep pace
with the growth in the cost of living.

This means that while making
even minor changes to Social Security is politically difficult, politicians are
not going to let it go broke. It is much more likely that Social Security will
get the tweeks it needs to stay strong for the next 50 years. Even if there are changes, any significant reduction in benefits will almost certainly be applied only
to younger workers.

The bottom line: if
you are in your 60s today, you can count on Social Security. It should be there
for the rest of your life. And it won’t run out like your savings might if you
live too long. Social Security should remain as your most reliable source of
retirement income, even as you and/or your spouse live well beyond age 90.

The
Math: Benefit Reductions and Increases

Here is the math on
how early vs. delayed claiming affects your Social Security retirement benefit.

Reduced
retirement benefitscan be claimed as early as age 62. For
workers who reach age 62 in 2005 through 2016, the maximum reduction is 25
percent. For example, if your FRA benefit is $1,000 a month, you can claim and
receive a benefit of $750 a month at age 62.

Increased
retirement benefitsare receivedby insured workers who
postpone their retirement beyond FRA. Their benefits are increased for each
month of nonpayment beyond their FRA up to age 70. This increase is called a “delayed
retirement credit.”

The total credit possible per year for delayed retirement
credits is 8 percent for workers who reach age 62 in 2005 or later. This means
that insured workers who wait until age 70 to start receiving benefits will
receive a 32% increase in their monthly benefit for the rest of their lives.
For example, if your FRA benefit is $1,000 a month, you can wait to claim and
receive a benefit of $1,320 per month at age 70.

In other words, by
waiting until age 70 to claim, you will increase your monthly benefit by 76%
over what you receive if you claim at age 62.

The amount you receive
when you first get benefits sets the base for the amount you will receive for
the rest of your life. Your retirement payments will change each year based on
cost of living adjustments. But these proportionate reductions or increases are
permanently locked in.

Issues
to Consider Before you Decide

When to claim Social
Security is surely one of the most important decisions we face at retirement. Delaying your claim is the smart choice for many people but not for everyone. The best choice for you will
depend on your personal circumstance including your current cash needs, your
health situation, your family longevity, and your future financial needs.

Do you have other
income to support you if you decide to delay taking your benefits?

Will other family members
qualify for benefits with you on your record?

Too Important to Take Lightly

When to claim Social
Security is a critically important decision that most seniors are making
without adequate information and consideration of the long term consequences. But
it is vital to your future financial security and standard of living.

According to A.
Barry Rand CEO of AARP “the typical older American has an income of about
$22,000 a year, and Social Security accounts for about half of a typical older
family’s income.” And even if you are a higher middle income couple, Social Security
is likely to make up 20% or more of your retirement income.

Claiming your benefit should not be a
casual decision. Spend some time considering the implications for you and your
spouse.

Social Security is
complicated with many tricks and traps. Strategies have been developed to help
you maximize your benefits. And computer programs have been developed that can
help you understand the financial implications of your decisions.

You can research these
on your own. Or you may want to seek some expert guidance from a financial
planner, accountant or lawyer who is knowledgeable about Social Security before
you make any decisions. It’s worth the investment of your time and a few
dollars. Maximizing benefits can make a difference of $100,000 or more in income over the
lifetimes of a dual income married couple.

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About Me

I am a Pennsylvania lawyer with over 35 years experience in estate planning and elder law. I was selected by US News Best Lawyers® as its Lawyer of the Year in Elder Law for 2014 for the Harrisburg, Pennsylvania metropolitan region.
I am of counsel to Marshall, Parker and Weber, a law firm which has offices in Williamsport, Jersey Shore, Wilkes-Barre and Scranton, Pennsylvania. I am past President and a founder of PAELA (the Pennsylvania Association of Elder Law Attorneys). However, the views expressed on this site are my own and not those of PAELA or of Marshall, Parker and Weber.
Most importantly I am a husband, father and grandfather.